Multi-market contact, tacit collusion, and decentralized managerial decision-making

Abstract

Competition in a market may be weaker if the same firms also compete against each other in other markets. Conventional explanations for this mutual forbearance depend on centralized firm decision-making, which permits the threat of concerted retaliation across many markets at once. However, in large firms, market-level decisions may be delegated to managers. We show that multi-market contact can still promote tacit collusion in this case, even though each manager cares only about profit in her own market. In our model, the main linkage between markets is informational: in collusive equilibria of a repeated game with noisy monitoring, outcomes in a second market may be evidence about a competitor's incentives in a first market. The model expands the antitrust concerns about multi-market contact to situations in which independent branch-level decision-making appears to be occurring.